IMF to Turkish Central Bank: Get Your Act Together

Even in the International Monetary Fund’s understated diplo-speak, it was a pretty sharp rebuke of Turkey’s central bank.

The IMF started its econ-slam by telling Governor Erdem Başçı he needed to increase rates as a matter of “immediate priority” to help tame near-rampant inflation.

High credit growth, stubbornly-high inflation and a widening trade-and-finance deficit “all warrant positive real policy rates, in particular the one week repo rate,” the fund said in its annual review of the economy.

Next, the fund criticized the central bank for relying too much on its currency reserves to buffer against capital flight. The bank has used more than 15% of its currency stockpile in the effort.

“The authorities should use sales of foreign exchange reserves only to address excessive volatility, as foreign exchange rate interventions cannot substitute for the right monetary stance,” the IMF said.

Like a raft of other emerging-market economies around the globe, Turkey is having a tough time trying to fight inflation with a currency weakened by foreign investors pulling their capital out en masse.

Investors are reassessing their portfolios world-wide now that the U.S. Federal Reserve has started talking about exiting from its easy-money policies. In the past several months, Istanbul’s stock index has lost a third of its value, the lira plummeted and bond yields doubled.

The IMF is particularly concerned about the ability of the country to handle future bouts of volatility, predicting more currency depreciation and more capital flight as “a major challenge for the Turkish economy.”

The IMF’s final critique was perhaps the sharpest.

Turkey’s central bank policy framework is overly complex, has too many objectives, and is undermining its very mandate.

“The current framework might not be helping to deliver the authorities’ inflation target and may have weakened the monetary transmission mechanism,” the fund said.

Especially as investors are taking a hard look at the portfolios in emerging markets, trying to sift the winners from losers, “the framework is increasingly questioned by markets and complicates the communication policies,” the IMF said.

“Normalizing the framework would boost policy credibility and simplify communication,” it said.

About Real Time Economics

Real Time Economics offers exclusive news, analysis and commentary on the U.S. and global economy, central bank policy and economics. Send news items, comments and questions to the editors and reporters below or email realtimeeconomics@wsj.com.